Risk Management in Banking Review Questions
Course Introduction
Risk Management in Banking explores the principles and methodologies essential for identifying, assessing, and mitigating various types of risks faced by financial institutions. The course covers credit risk, market risk, operational risk, and liquidity risk, emphasizing regulatory frameworks such as Basel Accords and the integration of risk management strategies into banking operations. Students will develop analytical skills through case studies and practical applications, gaining insight into tools like value-at-risk, stress testing, and risk-adjusted performance measurement, all crucial for ensuring the stability and profitability of modern banks.
Recommended Textbook Bank Management 7th Edition by Timothy W. Koch
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Page 2
Chapter 1: Banking and the Financial Services Industry
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Sample Questions
Q1) Securitization refers to the process of splitting a single loan into several smaller loans.
A)True
B)False
Answer: False
Q2) S-corporations must have no more than ___ shareholders.
A)10
B)50
C)100
D)500
E)1,000 Answer: C
Q3) Which of the following is not a channel for delivering banking services?
A)Mobile banking.
B)Online banking.
C)Automated Teller Machines.
D)Branch banking.
E)Retail banking.
Answer: E
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Chapter 2: Government Policies and Regulation
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Sample Questions
Q1) Bank regulations:
A)can prevent bank failures.
B)can eliminate economic risk for banks.
C)serve as guidelines for sound operating policies.
D)guarantee bankers will make sound management decisions.
E)guarantee bankers act in an ethical manner.
Answer: C
Q2) A new charter to start a federal savings association is obtained from the:
A)Office of the Comptroller of the Currency.
B)National Credit Union Administration.
C)Office of Thrift Supervision.
D)State banking department.
E)Federal Reserve
Answer: C
Q3) Most banks have the ability to easily raise new capital by issuing new equity.
A)True
B)False
Answer: False
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Chapter 3: Analyzing Bank Performance
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Sample Questions
Q1) Everything else the same, financial leverage works to a bank's advantage when:
A)the return on assets is positive.
B)the return on assets is negative.
C)fixed assets are high.
D)fixed assets are low.
E)a.and d.
Answer: A
Q2) What is the return on equity for a bank that has an equity multiplier of 12, an interest expense ratio of 5%, and a return on assets of 1.1%?
A)5.0%
B)13.2%
C)8.2%
D)26.4%
E)0.66%
Answer: B
Q3) Smaller banks generally employee fewer people per dollar of assets than larger banks.
A)True
B)False Answer: False
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Chapter 4: Managing Noninterest Income and Noninterest
Expense
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Sample Questions
Q1) Demand for checking accounts is generally considered to be price inelastic.
A)True
B)False
Q2) Discuss how bank's can reduce the number of unprofitable customers.
Q3) If a bank pays 62 cents in non-interest expense per dollar of net operating revenue, its _______ is equal to 0.62.
A)burden
B)net non-interest margin
C)efficiency ratio
D)overhead ratio
E)non-interest expense ratio
Q4) Banks experience diseconomies of scale when:
A)marginal costs increase as total costs decrease.
B)total costs decrease as output decreases.
C)total costs increase as output increases.
D)average unit costs increase as output increases.
E)average unit costs decrease as output increases.
Q5) Discuss two ways that a bank can decrease its non-interest expense.
Q6) Discuss why the net interest margin for banks has generally been declining for the past several years. Page 6
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Page 7
Chapter 5: The Performance of Nontraditional Banking Companies
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Sample Questions
Q1) BMW Financial Services is owned by BMW Bank.
A)True
B)False
Q2) Discuss the benefits to BMW North America of owning BMW Bank .
Q3) On Goldman Sachs' balance sheet for 2007, ___________ consist of securities that Goldman Sachs has borrowed under an agreement to resell at a later date..
A)collateralized agreements
B)financial instruments
C)collateralized financings
D)receivables
E)payables
Q4) Under FASB 157, the valuation of Level 1 assets is labeled:
A)marking to market.
B)marking to matrix.
C)marking to myth.
D)marking to major.
E)marking to minor.
Q5) Mortgage origination makes up the largest portion of Goldman Sachs' business. A)True
B)False
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Chapter 6: Pricing Fixed-Income Securities
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Sample Questions
Q1) The greater the compounding frequency, the higher the present value, everything else the same.
A)True
B)False
Q2) A bank quotes you an effective annual rate of 10% on a semi-annual investment.What is the annual simple interest rate?
A)9.76%
B)10.00%
C)10.25%
D)10.79%
E)10.96%
Q3) All other things the same, low coupon bonds have greater relative price volatility than high coupon bonds.
A)True
B)False
Q4) The greater the compounding frequency, the higher the future value, everything else the same.
A)True B)False
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Chapter 7: Managing Interest Rate Risk: Gap and Earnings
Sensitivity
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Sample Questions
Q1) Which of the following is not a disadvantage of static GAP analysis?
A)Static GAP analysis depends on the forecasted interest rates.
B)Static GAP analysis often considers demand deposits as non-rate sensitive.
C)Static GAP analysis does not consider the cumulative impact of interest rate changes on the bank's position.
D)Static GAP analysis does not consider a depositor's early withdrawal option.
E)All of the above are disadvantages of static GAP analysis.
Q2) Income statement GAP is also known as Omega GAP..
A)True
B)False
Q3) Discuss the similarities and differences between earnings sensitivity analysis and income statement GAP analysis.
Q4) Which of the following does not have an embedded option?
A)A callable Federal Home Loan Bank bond.
B)Demand deposit accounts.
C)A home mortgage loan.
D)An auto loan.
E)All of the above have embedded options.
Q6) What are the advantages and disadvantages of static GAP analysis? Page 10
Q5) Discuss the difference between a bank's periodic and cumulative GAP.
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Chapter 8: Managing Interest Rate Risk: Economic Value of Equity
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Sample Questions
Q1) Effective duration:
A)estimates when embedded options will be used.
B)directly indicates how much the price of a security will change given a change in interest rates.
C)is always greater than maturity.
D)is a weighted average of the time until cash flows are received.
E)All of the above
Q2) A 10-year annual coupon bond is currently selling for its par value of $1,000 with an annual yield of 5%.If the bond is callable at par, what is the effective duration of the bond, assuming rates change by 1%?
A)10 years
B)7.36 years
C)5.52 years
D)4.60 years
E)3.68 years
Q3) How does effective duration differ from modified duration?
Q4) Discuss why a bank may have to sacrifice yield to vary its duration gap.
Q5) Why is it difficult to estimate the duration of demand deposits?
Q6) What are the strengths and weaknesses of duration gap analysis?
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Chapter 9: Using Derivatives to Manage Interest Rate Risk
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Sample Questions
Q1) When you own the underlying security, your spot position is _______.
A)flat.
B)long.
C)short.
D)is also known as your cash position.
E)b.and d.
Q2) The daily change in the value due to the marking-to-market process is know as the:
A)maintenance margin.
B)variation margin.
C)market margin.
D)initial margin.
E)marked margin.
Q3) Swap participants are subject to:
A)margin requirements.
B)Federal Reserve regulation E.
C)exchange performance.
D)counterparty risk.
E)All of the above.
Q4) Discuss the difference between speculating and hedging.
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Chapter 10: Funding the Bank
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Sample Questions
Q1) With "relationship pricing":
A)banks unbundle services and charge separate prices for each.
B)service charges decline with larger customer deposit balances.
C)interest rates paid on deposit accounts decreases with customer deposit balances.
D)large depositors pay the highest fees.
E)small depositors receive the highest interest rates.
Q2) Small time deposits are characterized by all of the following except:
A)they have denominations are less than $100,000.
B)they have substantial interest penalties for early withdrawal.
C)banks can pay market interest rates on them.
D)there is a substantial interest penalty for early withdrawal.
E)they have a minimum maturity of 3 days.
Q3) The Expedited Funds Availability Act stipulates that local checks typically must be cleared in no more than _____ business days.
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Chapter 11: Managing Liquidity
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Sample Questions
Q1) Why do banks prefer a lagged reserve accounting system to a contemporaneous reserve accounting system?
Q2) The section of a contingency plan that assesses the impact of potential adverse events on the bank's balance sheet is known as the _________ section?
A)narrative
B)qualitative
C)quantitative
D)summary
E)descriptive
Q3) Which of the following could be used to identify a potential increase in borrowing by customers that might deplete a bank's cash reserves?
A)The amount of insured versus uninsured deposits
B)Large deposits held by a single entity
C)Volume of Fed Funds sold
D)The sensitivity of deposits to changes in the level of interest rates
E)Unused commercial credit lines outstanding
Q4) Discuss the major components of a bank's contingency funding plan.
Q5) What is a "bankers' bank"?
Q6) How can pledging requirements make bank assets less liquid?
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Chapter 12: The Effective Use of Capital
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Sample Questions
Q1) What is "moral hazard" and what is its impact on deposit insurance?
Q2) For banks that have insufficient capital, which of the following is not a typical operating strategy to achieve capital adequacy?
A)Limit asset growth
B)Shrink the bank
C)Increase the dollar amount of commercial loans outstanding
D)Shift more bank assets into lower risk categories.
E)Reprice assets to reflect greater equity support
Q3) How do capital requirements constrain bank growth?
A)By discouraging investments in Treasury securities.
B)By disallowing the ownership of mortgage loans.
C)By decreasing a bank's net interest margin.
D)By limiting the amount of new assets that a bank can acquire through debt financing.
E)By reducing a bank's CAMELS ratings.
Q4) An adequately capitalized bank may obtain brokered deposits without FDIC approval.
A)True
B)False
Q5) Discuss the rationale behind risk-based capital requirements.
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Chapter 13: Overview of Credit Policy and Loan
Characteristics
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Sample Questions
Q1) _______________________ represents the amount of long-term financing required for current assets.
A)Permanent working capital
B)Seasonal working capital
C)Secondary working capital
D)Perpetual working capital
E)Passive working capital
Q2) Which of the following would be considered a "positive" loan covenant?
A)Days receivables outstanding cannot exceed 30 days
B)No change in senior management
C)Capital outlays cannot exceed $1,000,000 per year
D)No additional liens may be placed on the collateral
E)The bank must approve any firm mergers or acquisitions
Q3) Businesses can obtain funds from which of the following?
A)Loans from life insurance companies
B)Issuing commercial paper
C)Issuing junk bonds
D)Loans from commercial banks
E)All of the above
Q4) Discuss the five Cs of good credit and the five Cs of bad credit
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Chapter 14: Evaluating Commercial Loan Requests and Managing Credit Risk
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Sample Questions
Q1) Discuss which is more expensive for a bank: Extending credit to a customer who ultimately defaults, or denying credit to a customer who would have paid the bank back.
Q2) Which of the following is not part of the four-stage process for evaluating the financial aspects of commercial loans?
A)An analysis of the firm's management, operations, and industry.
B)Performing financial ratio analysis.
C)Analyze the firm's cash flow.
D)Examining the backgrounds of the sales force.
E)Project the borrower's financial condition.
Q3) Cash flows from a firm's normal business activities are reflected in:
A)cash flows from investing.
B)cash flows from financing.
C)cash flows from operations.
D)cash flows from income.
E)cash flows from budgeting.
Q4) Why is it important to compute pro forma common size balance sheets and income statements when evaluating a commercial loan?
Q5) Explain how sensitivity analysis assists in evaluating commercial loan requests.
Page 18
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Chapter 15: Evaluating Consumer Loans
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Sample Questions
Q1) Today, many banks target individuals as the primary source of growth in attracting new business.
A)True
B)False
Q2) Consumer loans are typically very similar such that a comprehensive analytical format can be used for all loans.
A)True
B)False
Q3) The vast majority of credit card revenues comes from:
A)merchant discounts.
B)net credit gains.
C)advertising revenue.
D)interest income and annual fees.
E)interchange fees.
Q4) Which is more expensive for a bank: 1.Making a loan to a customer that does not pay the loan back or 2.Denying a loan to someone who would have paid the bank? Explain your answer.
Q5) A FICO score summarizes an individual's credit history in one number.
A)True
B)False
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Chapter 16: Managing the Investment Portfolio
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Sample Questions
Q1) Which passive investment strategy differentiates between bonds that have been purchased for liquidity versus income purposes?
A)Barbell maturity strategy
B)Riding the yield curve
C)Laddered maturity strategy
D)Timing maturity strategy
E)Cycle maturity strategy
Q2) All of the following are basic functions of a bank's trading activities except:
A)offering investment advice to customers.
B)maintaining an inventory of securities for possible sale to investors.
C)speculating on short-term interest rate movements.
D)All of the above are basic functions of a bank's trading activities.
E)None of the above are basic functions of a bank's trading activities.
Q3) Bank managers are often reluctant to sell securities when the market value falls below the book value.Why? Is this behavior in the long-term best interest of the bank? Why or why not?
Q4) When loan demand is weak, banks should keep investments short-term.
A)True
B)False
Q5) What are STRIPS and what do banks find advantageous about them?
Page 20
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Chapter 17: Global Banking Activities
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Sample Questions
Q1) Which of the following is an example of a Eurocurrency?
A)A branch of a Canadian bank located in Paris accepts a deposit in U.S.dollars.
B)A branch of a U.S.bank located in Tokyo accepts a deposit in Japanese yen.
C)A branch of a U.S.bank located in New York accepts a deposit in U.S.dollars.
D)A branch of a London bank located in Paris accepts a deposit in Euros.
E)A branch of a Swiss bank located in Mexico City accepts a deposit in Mexican pesos.
Q2) Discuss the advantages and disadvantages of a universal banking model.
Q3) The default risk associated with loans made to borrowers outside a bank's home country is called:
A)foreign exchange risk.
B)sovereign risk.
C)euro risk.
D)country risk.
E)LC risk.
Q4) Foreign banks generally operate with higher capital ratios than U.S.banks.
A)True
B)False
Q5) How has the creation of the European Community impacted the banking industry in the U.S.and in Western Europe?
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